Kenneth R. Szulczyk
these examples making them easy to understand. For example, once Seattle Scientific received
funds from Japan in Strategies 1 and 2, it would deposit the funds at a U.S. bank to earn interest
for two months. Thus, all these strategies would have the same time horizon and thus be
comparable.
ݐ݊ݑ݉ܽ($)= 12. 5 ݈݈݊݅݅݉ ݊݁ݕ൭$1ൗ 110. 40 ݊݁ݕ൱=$113, 224. 64 (16)
Strategy 4: Seattle Scientific granted the 4.5% discount and receives its funds today. This
strategy has no exchange rate risk because the firm transfers the funds to the U.S. today using
the spot exchange rate. Consequently, Seattle Scientific receives $107,158.89, calculated in
Equation 17. This strategy yields the smallest amount for the accounts receivable. Nevertheless,
Seattle Scientific receives its funds today. Next, it could invest these funds into a U.S. financial
institution and earn interest for 90 days. An analyst would need to adjust the time horizon for
this strategy, so it matches the time horizons for the other strategies. Strategy 3 set the greatest
time horizon at 90 days.
ݐ݊ݑ݉ܽ($)= 12. 5 ݈݈݊݅݅݉ ݊݁ݕ( 0. 955 )൭$1ൗ 111. 40 ݊݁ݕ൱=$107, 158. 89 (17)
For the last example, a company, Farah Jeans, plans to construct a new factory in
Guatemala, and it owes 8.4 million quetzals in six months, creating an accounts payable. Farah
Jeans wants to reduce its exposure for this transaction. A specialist faces with the following
strategies.
- Spot exchange rate equals 7.0 quetzals per $1. Analyst believes the Guatemalan Central
Bank will devalue the quetzal to 8.0 quetzals per $1. However, the analyst believes a small
chance that the quetzal could strengthen to 6.4 quetzals per $1. - Farah Jeans could enter a 180 - day forward contract with an exchange rate of 7.1 quetzals /
$1. - Farah Jeans immediately transfer the funds to Guatemala and earn the interest rate 14% APR
for 180 days. - Farah Jeans could invest in the United States and earn 6% APR for 180 days and then use a
forward contract to transfer funds to Guatemala.
Strategy 1: Farah Jeans could use the spot exchange rate to pay its account payable.
Unfortunately, the spot exchange rate entails an exchange rate risk. In some cases, a currency
forecast is not accurate because unanticipated events cause wild fluctuations in currency